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i2 Technologies - surprise in the software sector

We're always looking for new ways to sort and filter our stock indicators. We executed the usual weekend Alert HQ process (read about this weeks results) and generated several lists of stocks based on our special screens including: Bollinger Band Breakouts, Trend Leaders and Cash Flow Kings (you can download these lists at the Trend Leaders page). It's always interesting to combine the screens and see what stocks are common across the board.

For today's featured stock I combined the following three screens: the Trend Leaders (stocks registering strong signals using Aroon analysis, DMI and MACD and at least 1% above their 50-day exponential moving average), the Cash Flow Kings (stocks exhibiting a cash flow yield of 25% or more) and the Cash Flow to Debt Coverage above 0.7 screen.

One of the stocks that popped out of this combined screen is i2 Technologies (ITWO). The company provides supply chain management software for manufacturing and planning; transportation and distribution management; merchandising, assortment, and allocation planning; execution, collaboration, and visibility; supplier relationship management; and data management and business analytics.

In terms of selected fundamentals that we looked at in our screens the cash flow yield is 33%, the Cash Flow to Debt Coverage came out at 0.71 and the technical indicators are definitely showing plenty of positive momentum (see the chart below).

In addition to the Aroon, DMI and MACD indicators looking bullish, we see the 20-day MA has just crossed above the 50-day MA. Note, however, that RSI is showing the stock to be over-bought.

Despite the momentum indicated by the trajectory of the stock price, ITWO is not really over-valued. The PE is a measly 2, PEG is a moderate 1.37 and the Price-to-Sales ratio is only 0.7, a quite reasonable number. Considering this is a tech stock, these numbers seem all the more attractive from a value perspective.

So what's driving ITWO?

In a word - earnings. According to Yahoo! Financial, the year-over-year quarterly earnings growth is 282%. Not too shabby! The company's 4th quarter earnings beat expectations, rising more than fourfold, helped by a $20 million termination fee they received after ending a deal to be purchased by JDA Software Group Inc. Excluding all one-time items, the company earned $0.31 per share compared to $0.19 in the year before. Analysts had been expecting only $0.22.

Can they keep it up? The following factors provide a hopeful outlook:

Management thinks that there is some pent up demand out there. Some customers had held off whle waiting to see how the acquisition by JDA worked out. Now that this situation is clear, management expects certain customers to move forward.

The company has the benefit of a steady stream of maintenance fees, much as Oracle does, though it did decrease a bit during this quarter.

Management feels that the benefits provided by i2 software in terms of efficiencies and cost savings are just what many companies are looking for in these tough economic times.

The company is doing a good job of managing and reducing expenses.

The balance sheet is stronger. There is a better cash position and the company may return a dividend to holders or elect to buy back stock.

The company is reducing debt.

So i2 Technologies is doing pretty well, having signed a major new customer and extending agreements with several others during this last quarter. The wild card, of course, is the macro-economic situation. The company's products are not cheap nor are they simple to implement. As economic pressure builds on potential customers, it may become more difficult for i2 to sign new customers. Still, the company is healthier financially and is currently building some momentum, both in terms of stock price and in terms of customer acceptance.

i2 Technologies has bucked the trend by posting solid numbers while most other tech companies are showing major year-over-year short-falls. The company is still priced for value and has a decent shot at continuing to grow though probably not as sharply as the most recent quarter. All in all, i2 Technologies seems to be a pretty attractive stock at this time though it would not be unexpected to see the stock pull back a bit after its recent run-up. The company looks like a good candidate for anyone seeking to allocate funds to the enterprise software sector.

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